Abu Dhabi, UAEThursday 22 October 2020

Oil set to end 2019 with biggest annual gain for three years

Prices are poised to increase by around 23 per cent this year — the largest rise since 2016

From January 1, Opec+, as the alliance led by Saudi Arabia and Russia is known will begin implementing deeper cuts of 2.1 million bpd. Reuters
From January 1, Opec+, as the alliance led by Saudi Arabia and Russia is known will begin implementing deeper cuts of 2.1 million bpd. Reuters

Oil is set to round off its best year since 2016, with Brent prices gaining 23 per cent and WTI gaining around 34 per cent in 2019, bolstered by the de-escalation in the US-China trade war and collective action by the Opec+ alliance in drawing down global inventories.

Brent prices fell slightly towards the close of the year, down 0.9 per cent and trading at $66.08 per barrel at 6.04pm UAE time, while West Texas Intermediate was down 1 per cent at $61.04 per barrel.

After ending last year at $53.86 per barrel, Brent has come a long way, touching $74.51 per barrel in April and spiking again in September by around 19 per cent in intraday trading to settle at $69.02 following the attacks on Saudi Aramco's facilities, which temporarily wiped out 5 per cent of global supply.

Oil remained in a tight band between $55 and $60 for much of the year, proving resilient to various geopolitical incidents in the Middle East such as a spate of attacks on tankers transiting the Strait of Hormuz because of slowing global demand, exacerbated by the trade war.

However, with the US and China agreeing to a phase one deal in December and planning to work on a phase two agreement next year, thereby placing previously-announced tariffs on hold, oil has rallied to three-month highs towards the close of the year.

"[The] main driver of the 2019 oil price rally was the supply side; the most important one was the production cut deal of Opec and its allies," said Giovanni Staunovo, commodity analyst at Swiss bank UBS.

"Voluntary cuts of Saudi Arabia, Kuwait, and UAE together with involuntary cuts of Venezuela and Iran have pushed Opec-14 crude production down by 1.9 million barrels per day year-on-year in 2019," he added.

From January 1, Opec+, as the alliance led by Saudi Arabia and Russia is known, will begin implementing deeper cuts of 2.1 million bpd, with Riyadh supporting the group with voluntary commitments of 400,000 bpd. The alliance is expected to review the pact by the end of the first quarter of 2020.

Modest growth in production from the US, the world's largest producer, as well as from other non-Opec supply sources such as Brazil also helped "tighten the market" despite a gloomy demand outlook for crude, said Mr Staunovo.

He does not expect the price rally to continue into the new year as "similar large Opec production cuts are unlikely to materialise in 2020".

The Zurich-based lender projects Brent will slow to $60 in the first half of 2020 before recovering slightly for the remainder of the year on the back of seasonal improving demand.

New supply is set to flood the market from sources outside of Opec, such as Norway, which is set to ramp up production from its Sverdrup field as well as Guyana and Brazil. Continued supply momentum from the US and Canada is also likely to help non-Opec supply outpace oil demand growth in 2020.

However, capacity additions "do not necessarily equate to production growth" in Brazil and Norway, which have high decline rates, said Energy Aspects.

The consultancy expects 2020 to be a challenging year for US shale, which is likely to struggle with investors turning their backs on financing the sector in turn continuing its slowdown.

A more sobering assessment of the oil market in 2020 comes from the Washington-based Institute of International Finance, which expects oil's current rally to be short-lived with demand growth forecast to slow to 1 million bpd next year.

Updated: December 31, 2019 07:38 PM

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